Soybean market signals change

URBANA, Ill. — U.S. policymakers and soybean producers need to wake up to the implications of dramatic changes in supply fundamentals, says a University of Illinois Extension agricultural policy specialist.

"Shifts in crop patterns and production are common, stimulated by economic signals from both the cost and demand side. This is the situation today in the soybean market," said Robert Hauser. "Producers should take advantage of these signals to increase profit; legislators should pay attention to them to improve policies."

He believes that a number of factors are driving toward greater production of corn in the United States at the expense of soybeans.

"Anyone who even remotely follows the commodity markets realizes that South America has changed the supply fundamentals in a dramatic way over the past 10 years," he explained. "We need to focus on some of the economic and policy implications of this increase in long-run production capacity."

Between 1970 and 2001, world soybean yield rose by 50 percent, but at the same time soybean production tripled, increasing by 260 percent. And, he noted, the 260 percent increase may be too small considering that most 2003 production projections for South America are now around 80 million metric tons, compared to the three-year average of 65 million metric tons used in the calculations.

Propelling this dramatic rise in South American soybean production are a number of factors.

"Soybean varieties have been developed that do well in Brazil's sub-tropical and tropical climates and soils," he explained. "Soil fertility has been increased successfully. No-till technology allows maintenance of this fertility in areas where it is quickly lost when the soil is turned over and exposed to sunlight.

"The opportunity cost of land in much of South America is very low. And, finally, economic conditions and inflation have stabilized over the past eight years. These factors not only have made it possible for South America, particularly Brazil, to engage in soybean production in a big way, but there are strong signs that the expansion is far from over."

After comparing a number of costs, Hauser concluded that parts of South America have a comparative advantage in growing soybeans over the United States.

"This idea is not well-received by many groups in the United States. But instead of denying this possibility, let's consider some of the ramifications," he said.

Current market prices are signaling U.S. farmers to move to a crop in which they enjoy a comparative advantage — corn. "Without the soybean loan rate program, this signal would be much stronger," he said.

Hauser said that this does not mean U.S. producers will quit growing soybeans entirely. Both domestic needs and a significant share of the export market will continue to support U.S. soybean production.

"But producers will increasingly consider two-year or three-year continuous corn rotations that will shift aggregate U.S. supply away from soybeans," he said.

Market prices in recent months have reinforced his contention that we are in a new era, said Hauser.

"In August, low yield expectations caused the most bullish U.S. production and carry-out conditions since the mid-1990s, yet the price of soybeans stayed below $6. Not long ago, it was reasonable for producers to expect at least $6 soybeans during normal years," he said. "This is now not normal. But this fact is neither good nor bad, unless we ignore it."

Hauser believes that the fundamental supply and demand situation in the world soybean market points to continuing low soybean prices due to increased South American production and the need for comparative advantage adjustments.

While the United States might have an absolute advantage (lower production and transportation costs) in growing soybeans, its opportunity cost (say, growing 140-bushel corn) is usually much higher than in Brazil where average yields for non-soybean crops are lower.

Hauser believes that in terms of comparative advantage, U.S. soybean producers are like the fast-typing business executive who nevertheless employs a typist, even though he types slower than the executive. The motivation is to free the executive to do other, more productive things.

"In the case of soybeans, U.S. producers may find themselves in the same situation as the executive, letting South America grow the soybeans because of greater incentives in the United States to produce corn," said Hauser.